Roth IRA’s can be an excellent retirement saving vehicle. Roth IRAs allow you to save $5,500 per year towards retirement if you are under 50. People who are 50 or older can contribute a “catch-up” contribution of $1,000 each year for a total Roth IRA contribution limit of $6,500 per year.
Unlike Traditional IRA’s and other tax-deferred retirement accounts, the Roth IRA allows you to contribute after-tax money. Contributing money that has already been taxed is beneficial because the IRS allows you to withdraw the money, and its accumulations, tax-free.
The research on investor performance is clear. The average mutual fund investor tends to have worse returns than the average mutual fund. Behavioral factors have a lot do with this. People tend to be emotional, and can often react in precisely the most incorrect way possible when markets are volatile. Fear often causes investors to sell investments when they are down. Performance chasing is another notable behavior. Heard a lot about the latest mutual fund that is performing so well? That’s probably not the time to buy it, yet many are tempted.
However, it isn’t always investor behavior that drives a departure from their own returns and that of the investments they hold. Often, it’s simply a mathematical function of the way so many of us save for retirement. In fact, employing a systematic saving strategy can have the opposite affect of a bad timing decision and amplify the investors return.